Third Circuit Confirms There’s No Wiggle Room With Jurisdictional Limitations

Friday, December 7, 2018

A precedential decision issued on November 28, 2018 by the U.S. Court of Appeals for the Third Circuit highlights the limits of bankruptcy judges’ authority to transfer non-core proceedings to other courts. The Third Circuit’s opinion in In re IMMC Corp. f/k/a Immunicon Corp., et al., Case No. 18-1177, also emphasizes the importance of choosing the right forum for filing post-confirmation litigation.

The facts of the eight-year long jurisdictional dispute are procedurally complex, but are crucial to understanding the potential significance of the Third Circuit’s ruling. In 2008, IMMC Corporation (the “Debtor”) filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware. Roberto Troisio (the “Trustee”) was appointed liquidating trustee of the Debtor’s estate pursuant to the Debtor’s confirmed plan of liquidation.

In 2010, the Trustee filed an adversary proceeding in the bankruptcy court against the Debtor’s former officers and directors, alleging that these former officers and directors had breached their fiduciary duties by pursuing risky and costly litigation against a competitor of the Debtor. The Trustee argued that the adversary proceeding was a core proceeding or, in the alternative, a non-core proceeding related to the chapter 11 case, but the bankruptcy court held that it lacked jurisdiction to hear the claims asserted in the adversary. The bankruptcy court explained that after plan confirmation, a bankruptcy court’s “related to” jurisdiction is limited to matters that are closely connected to plan implementation, and the claims raised in the adversary proceeding did not have a sufficient nexus to implementation of the plan.

The Trustee did not appeal the bankruptcy court’s ruling, but instead moved to transfer the adversary proceeding to the U.S. District Court for the Eastern District of Pennsylvania pursuant to 28 U.S.C. § 1631. Section 1631 provides:

Whenever a civil action is filed in a court as defined in section 610 of this title or an appeal, including a petition for review of administrative action, is noticed for or filed with such a court and that court finds that there is a want of jurisdiction, the court shall, if it is in the interest of justice, transfer such action or appeal to any other such court in which the action or appeal could have been brought at the time it was filed or noticed, and the action or appeal shall proceed as if it had been filed in or noticed for the court to which it is transferred on the date upon which it was actually filed in or noticed for the court from which it is transferred.

Section 610 provides, in relevant part, that “courts includes the courts of appeals and district courts of the United States, the United States District Court for the District of the Canal Zone, the District Court of Guam, the District Court of the Virgin Islands, the United States Court of Federal Claims, and the Court of International Trade.” The bankruptcy court denied the motion to transfer, reasoning that bankruptcy courts are not “courts” as defined by section 610 and therefore the bankruptcy court lacked authority under section 1631 to transfer the adversary proceeding.

The Trustee thereafter filed a motion to withdraw the reference in the U.S. District Court of Delaware. Typically, a motion to withdraw the reference is a procedure that would permit matters that were automatically referred to a bankruptcy court pursuant to a general order to be returned to and heard by the district court. The district court denied the motion, reasoning that “because the Bankruptcy Court lacked jurisdiction over the adversary proceeding, the action was never properly transferred to the Bankruptcy Court, and the District Court could not withdraw the reference of a proceeding that was never referred.” Following the district court’s decision, the Trustee filed a new motion with the bankruptcy court to transfer the adversary proceeding to U.S. District Court for the Eastern District of Pennsylvania, which the court treated as an unsupported motion for reconsideration of its earlier order denying the motion to transfer, and denied the motion.

This time, the Trustee appealed the denial of the motion to transfer and the “renewed” motion to transfer to the district court. Applying the same reasoning as did the bankruptcy court, the district court affirmed both orders, holding that bankruptcy courts are not “courts” as defined by section 610. Thereafter, the Trustee appealed the district court’s order to the Third Circuit.

On appeal, the Trustee again argued that bankruptcy courts have authority to transfer proceedings pursuant to 28 U.S.C. § 1631 because they are “courts” as defined by section 610. The Trustee cited the Third Circuit’s decision in In re Schaffer Salt Recovery, 542 F.3d 90 (2008), in which the court held that bankruptcy courts are “units” of the district court for purposes of 28 U.S.C. § 451, as precedential support for finding that bankruptcy courts are “courts” as defined by section 610 and are thereby authorized under section 1631 to transfer proceedings. However, the Third Circuit rejected the Trustee’s arguments because in Schaffer, unlike here, it was undisputed that the bankruptcy court had jurisdiction over the bankruptcy petitions pursuant to 28 U.S.C. § 157. Instead, the Third Circuit refocused the issue on the bankruptcy court’s ruling that it lacked jurisdiction to hear the case because the adversary proceeding was neither core nor related to the chapter 11 case. The Court explained that if the bankruptcy court “[e]xercis[ed] jurisdiction over the adversary proceeding so as to transfer it under § 1631 [such action] would have been ultra vires, regardless of whether bankruptcy courts fall under § 610’s definition of courts.”

Although the question of whether bankruptcy courts are “courts” as defined under section 610 remains undecided, the Third Circuit’s decision reaffirms the well-established principle that bankruptcy courts are courts of limited jurisdiction and, more specifically, that the jurisdictional limitation includes a limitation on the courts’ authority to exercise jurisdiction simply to transfer adversary proceedings. Going forward, bankruptcy attorneys should be very deliberate about where they file post-confirmation litigation since the bankruptcy court may not have jurisdiction over the case unless the case is connected to plan implementation. At a minimum, this decision illustrates the various times during which the Trustee could and should have refiled the proceeding or appealed the bankruptcy court’s finding that the adversary proceeding was a non-core proceeding.

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